United States Channel: Latest Posts

Summary: This post gives a brief description of government stimulus programs, based on theory and past experience. Although there is a strong and broad consensus among economists on these things, it is not unanimous. And there is debate on about many aspects — esp how to balance short-term needs and long-term costs. This is a follow-up to A situation report about the global economy, as the flames break thru the firewalls.

Contents

Fiscal stimulus is a palliative, not a cure

Long term vs. Short term stimulus

Which stimulus programs work best?

What stimulus measures give the most “bang for the buck”?

What types of tax cuts and transfer payments have powerful short-term effects?

Here is something to mull over: Technically, 7,470 in the DJIA is the 50% retracement of the entire bull market that began in August 1982.At 7,100, we not only cut in half the October 2007 highs of 14,198.50, but we have given back 50% of the 27 year move from the start of the big bull market of the 1980s to yesterday.That is astounding . . .

Lots of analysts are shouting that stocks are undervalued because next year’s earnings are only down 25% while the stock prices are down 50%. They claim this means the equities are a buy. They’re ignoring the important question of how much we should pay for those earnings.

Here’s a graph of the historical PE (price to earnings) ratio of US equities over the last 100 years. The PE ratio is what investors were willing to pay for a company relative to the previous year’s earnings. A lot of things affect what investors are willing to pay including interest rates, the opportunity cost of their money, expected inflation, and their general tolerance for risk.

Summary: This is an attempt to gain a historical perspective on our time, speculation about our present and future — seen in terms of past cycles.Here is a surefire way to get economists’ attention: tell them that we are only in the second “inning” of this downturn. Their incredulity results from belief that the trough is near — with the recovery (fast or slow) starting this Fall or Winter.Perhaps. Posts on this site describe an alternative view, that the post-WWII era has ended. We have entered a transitional period. This has been the pattern of modern history.

For a complete list of Beginners articles, see Financial Crisis for Beginners.You may have seen in the news that the government is thinking about exchanging its “preferred stock” in Citigroup for “common stock.” Here’s one of many articles. Which, if you are at all sensible and have any sense of proportion in your life, should be complete gobbledygook. The first part of this article will try to explain the gobbledygood; advanced readers can skim it. The second part will offer some of the usual commentary.Banks, like all companies, have balance sheets. On one side they have assets – stuff they own. On the other side they have liabilities – money they owe other people – and equity. Equity can be thought of in two ways. First, it is the money that the initial owners put in to start the business; before you can borrow money from someone else, you usually have to have some money or other assets of your own that you put in. Added to that money are retained earnings – all the profits the company has made but has not paid out to the owners as dividends. Second, equity is what is left over after you pay off all your creditors. If you sold the assets and paid off the liabilities, the rest would go to the company’s owners.

Summary: This site opened in November 2007 with three posts about this crisis, describing it as End of the post-WWII geopolitical regime. Until we and our leaders understand this, we can neither appropriately respond to events nor prepare for future problems. While the title overstates the situation (there are many who understand), it captures the key mental barrier we must cross in order to cope. These are just guesses, but they have proven fairly accurate during the past 16 months.Contents

It has been interesting to me how much excited commentary has been elicited by my posts on output gaps. [0], [1], [2], [3] I had thought the subject fairly uncontroversial, especially my reliance upon the CBO measure, which is calculated in a conventional manner, and is an object well-understood in mainstream macroeconomics (take your pick — from Hall and Papell to Mankiw). However, it’s clear that there is no such agreement in the blogosphere (which can be taken as an indicator of how dispersed beliefs are in that world). In any case, the reaction tells me that one’s belief in what determines potential GDP defines in large part how one thinks about the workings of the economy, and so I thought it useful to discuss alternative measures coming out of current academic work.

Macroeconomics gets the headlines, especially lately, but there’s a lot more to economics than the study of abstract aggregates used as barometers of economic performance. Robert Stavins follows up on his post arguing that market failure is common in the environmental domain with an explanation of why simple solutions to these problems are often inadequate:

The Myth of Simple Market Solutions, by Robert Stavins: I introduced my previous post by noting that there are several prevalent myths regarding how economists think about the environment, and I addressed the “myth of the universal market” ­– the notion that economists believe that the market solves all problems. In response, I noted that economists recognize that in the environmental domain, perfectly functioning markets are the exception, not the rule. Governments can try to correct such market failures, for example by restricting pollutant emissions. It is to these government interventions that I turn this time.

The McKinsey Quarterly released the results of its Economic Conditions survey, conducted January 27, 2009 – February 2, 2009. The survey is broad-based, where 1,820 executives were surveyed from around the world and across a large set of industries. The first notable finding of the survey is the following silver lining: 40% of executives believe that the economy will initiate recovery by the end of 2009.

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Aaron Menenberg is Foreign Policy and Energy analyst, and a Future Leader with Foreign Policy Initiative. He also co-hosts Podlitical Risk (@podliticalrisk). He is a graduate student in international relations at The Maxwell School of Syracuse University. Previously he has worked at Praescient Analytics, The Hudson Institute, for the Israeli Ministry of Defense, and at the IBM Corporation. The views expressed are his own, and you can follow him on Twitter @AaronMenenberg. He welcomes questions and comments at menenbergaaron@gmail.com.

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